a blog about marketing, social media, bits and pieces on psychology and behavioural economics

Wednesday, 28 November 2012

Short termism is the key to business success

What i didn't understand properly and what even the less imaginative accountants acknowledge is that profit is not an absolute concept. You tend to think of profit as something factual and indisputable. But profit depends on a variety of factors like how you decide to depreciate assets, how you treat the expected future flow of revenues from service contracts and at what point the costs hit the bottom line. Of course businesses think they are trying to maximise profits but the interesting question is over what time period. Those in the business who have a shorter term horizon focus on reducing costs and maximising margin, those focused on the longer term focus on maximising the contribution from a customer. In other words if you rip off a customer the chances are they will piss off earlier than you hoped. Unfortunately it is a lot easier to reduce costs and increase margin which goes some way to explaining why so many businesses have such a short term outlook and are run by accountants and not marketers. The fact that us marketers have managed to create a reputation for being being unable to add up and being not very commercial also explains why we are not on top of the pile.